What Should the Fed Do To Stimulate Growth?

The Federal Reserve’s two-day policy meeting begins tomorrow. It’s unclear what action the Fed will take, given the sluggish economy, high unemployment and the effects of the recent government shutdown.

Some economists say inflation is just what the country needs. Meanwhile, Republican Senator Rand Paul is threatening to delay the confirmation of Janet Yellen as the next chair of the Federal Reserve.

The Federal Reserve's policymakers are meeting tomorrow, as they do every six weeks or so, to figure out what to do next. The expectation is that the Fed will not do much to pull back on its stimulus programs next to the tepid September jobs report and the economic impact of the government shutdown.

Joining us from New York to discuss is Cardiff Garcia, reporter at the Financial Times. Cardiff, welcome back.

CARDIFF GARCIA: Hey, Jeremy.

HOBSON: Well, what's likely to happen? Is it indeed the case that they won't do much?

GARCIA: Yeah. I think you nailed it. I think they are unlikely to slow down the pace at which they're supporting the economy and exactly for the reasons you mentioned. And this is a bigger deal than it sounds like because it was just a month ago that we thought the Fed would be able to slow down. But since then, we had the government shutdown which injected a new dose of uncertainty into the economy.

And we found out just last week that even before the shutdown, the labor market's pace of improvement was also slowing down throughout the summer. So this is the wrong time for it because it's important to remember that the Fed has two mandates. One is to stir the economy towards full employment. Well, we're nowhere close to that. And the second is to stabilize inflation at around 2 percent. Well, actually, it's missing on that target, too, because inflation has been much lower. So it's the wrong time to take its foot off the gas. And I think the Fed knows it doesn't really have much choice.

HOBSON: Well, let's talk about that inflation mandate because there was a big article in The New York Times over the weekend saying what many people have been saying, which is that inflation is too low and that the Fed actually should be doing more to boost inflation and that that may help the economy. Tell us about that.

GARCIA: Yeah. It's an important article. And it's certainly a fundamental shift in thinking in the last few years. So here's the easiest way to think about it, which that inflation only means that a dollar today is going to be worth a little bit less in the future. So it incentivizes people to spend more money. It incentivizes businesses to spend more money themselves to hire people, to buy new equipment, all the kinds of things that bolster the economy. Now, it does have to be the right kind of inflation. It has to be the kind of inflation that's very broad-based, gently rising across most goods and services, and it has to include wage gains. That, too, is a type of inflation.

And so, it makes it easier for people in businesses to also pay off their debt. And it incentivizes them to take out new loans to spend money and to, you know, invest into the future. And so, it's really important, especially now, given that American businesses and people went into this recession with very high levels of indebtedness. And so, a little bit of inflation is important and it helps. And we don't have enough just yet. So it's important to keep an eye on it because too much inflation can also spiral out of control. But we're very far from that point. And I think, right now, it would certainly help.

HOBSON: But there's nobody saying at the Fed right now that they should actually boost their stimulus programs, the quantitative using to increase inflation, right? Every time they made the argument that these programs are necessary, it's been because they want to make the case for bettering the job market.

GARCIA: Absolutely. And part of this is that - I mean, this is kind of a lot of nuanced channels through its monetary policy works. But there's also the concept of inflation tolerance, which is to signal to businesses and to people that in the future, if inflation starts to go a little bit above the Fed's target, the Fed isn't going to try to slow the economy, at least not immediately. And so people see that, and they recognize it and, hopefully, it means that they'll be comfortable spending a little bit more money. And businesses will be comfortable hiring more people because they don't think that the economy will slow down if inflation starts going up a little bit. So this is all intertwined, and it's all a little bit nuance. But I think, right now, that's the direction the policy should be heading in.

HOBSON: Cardiff, we've just got a few seconds left, but do you think Janet Yellen is going to sail through to be the next chair of the Fed?

GARCIA: I sure hope so. I know that Rand Paul is making noises about holding up her nomination, but I hope it's just showboating. We don't need more congressional fractiousness and especially not on this one issue where the economy does have a little bit of clarity. So I hope not. I hope she does get through.

HOBSON: Cardiff Garcia, a reporter at the Financial Times. Thanks as always.